Q3 2019 Earnings Call
Greetings and welcome to the Federal Realty Investment Trust third quarter 2019 earnings Conference call. At this time, all participants are any listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, discomfort with being recorded.
I would now like to turn the conference over to your hosts Leo Brady. Please proceed.
Thank you. Good morning, Thank you for joining us today for Federal Realty's third quarter 2019 earnings Conference call joining me on the call or Don Wood, Dan G. Jasper guess, when do you see or Dawn Becker, Melissa Solis they'll be up available to take your questions at the conclusion of our prepared remarks as a reminder.
Certain matters discussed on this call may be deemed to be forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 forward. Looking statements include any annualize are projected information, that's all statements, referring to expected or anticipated events or results.
They've had a real t. believes the expectations reflected in such forward looking statements are based on reasonable assumptions federal realty's future operations and its actual performance may differ materially from the information are forward looking statements and we can give no assurance that these expectations can be obtained thirteens release, and supplemental reporting package that we issue but.
Our earnings our interim report filed on Form 10-K , an or other financial disclosure documents provide a more in that discussion of risks factors that may affect our financial condition and results of operations. These documents are available on our website.
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I'll turn the call over to John what to become a discussion of our third quarter results Don.
Thank you Leah and good morning, everybody.
Well, how variable accomplish something this quarter that we tried to do one successfully for the better part of the last decade and that is to acquire the wildly under market Kmart lease at Assembly square marketplace for $14 million or about 2.49 an acre.
That's very important six acre parcel will allow us to unlock overtime the significant value creation made possible by the successes assembly row over the years.
How is the both densifying unify the power center with the mixed use community.
Just a real estate acquisition through it through a GAAP required that it that the expense currently in the income statement.
Accordingly, as reported AFFO per share as $1.43, but the dollar 59, excluding that charge compared with the dollar 58 reported in last year's third quarter also remember that this years number.
Reflects the 2019 accounting change required they expensing of previously capitalized direct leasing cost of about two cents to share.
The quarter.
You know the Kmart lease acquisition is pretty darn representative of the focus and prioritization of our efforts. These days at this point this cycle and given the oversupply of retail nationally.
And then sounds significantly higher rents a significant increases the portfolio occupancy and landlord friendly lease terms at the only happening for growth is difficult.
It's tempting and a retail environment like this to keep that cash flow growing by making inferior short term decisions with regard to 10 selection lease terms redevelopment opportunities we won't do that.
Our focus on the next bunch of years nothing next bunch of months.
Because while the current environment is resulting in slower short term cash flow growth in earlier in the cycle. It's also creating more opportunities for medium and long term value creation in great locations that up until now we're not possible.
As I said, we've been back and forth with Kmart at Assembly for a decade with no economic deal close.
2019, and economically viable agreement was reached an even though we'll lose a million hours of rent in 2020, the unlocked significant value creation potential is obvious.
Similar story Darien, Connecticut were previously fruitless negotiations with stopping job took a productive turned 2019 with an economic deal agreed to resulting in the beginning of our planned development next quarter. After many years, we bought dairy and in 2013, we've been negotiating with stoppage.
That's 13 six years later, we have a deal and we'll start construction.
Of course will lose a million dollars a rent in 2020, but again the value creation never redevelop variant property Waldorf that.
Similar story I'm third street prominent Santa Monica, We're finally, we'll be well be free to redevelop an entire 45000 square foot building on the hard corner Wilshire and third Street currently occupied by an oversized banana Republic that was built for another time and then other consumer.
We'll lose $2 million a rent in 2020, but because of where it is well improve the value of back Warner and the value of other buildings, we held nearby significantly.
You've got the idea.
I've got another dozen stories like that on a smaller scale that I could bore you with but suffice to say that we're willing to sacrifice roughly $6 million or eight cents a share annually in order to create compelling retail and mixed use neighborhoods thatll be worth far more than they are today.
The retail real estate environment is more conducive to opportunities like these than at any point since the bottom of the last cycle in 2009 in 2010.
The fact that we can do all that and yet still grow overall cash flow, albeit more slowly from year to year, that's the power a great real estate even diversified skills.
Okay back to the core.
We did a lot of leasing.
95 comparable deals in the eight more noncomparable deals that is new space for nearly half a million square feet more than in the last year of core.
Comparable deals were done at first your cash rent 30, 893 for foot compared with 30 631 for <unk> last year. The previously a 7% increase higher rent was achieved overall across the board on anchors.
Most of deals both new and renewal leases.
Comparable property operating income was 2.1% higher this quarter than last year's third quarter and lease termination fees had a minimal impact on that metric as they approximated 2.8 million this quarter versus 2.6 last year.
The overall portfolio remained well leased and 94.2 per se, we would expect that'd be marginally lower in 2020, largely due to the repositioning opportunities I discussed early earlier as well as tenants failures like dress barn and others.
In terms of our roughly $350 million plus an annual development spend this year and next primarily comprised of office development at Santana Row Assembly row Rose along with retail development. It Cocowalk endeavoring if.
We remain on schedule and on budget.
You'll notice in our 8-K, an increase in scope. It cocowalk as we were successful in getting the two for GAAP space back early on the west side of the project, thereby allowing us to redevelop that side currently in conjunction with the bigger project.
Remain unchanged.
Look at our balance sheet at quarter end shows nearly $700 million up construction in progress we have an on going on at this point in time that will undoubtedly gray big new income streams in the future, but obviously not helpful to the piano this year or much of next.
Well in uncertain environment in like the one more in has created opportunities for us.
On our existing tenant base. It's also opens up opportunities among potential sellers, some really interesting real estate.
To that end, we currently have nearly $300 million in acquisitions tied up under contract with expected closings of most of it in the fourth quarter subject of course door completion of due diligence 30 million and that did close in the third quarter.
But even so I want to take you through those deals at a high level. Each one very different from the other with a very clear value created common denominator I also want to take you through funding sources, resulting results are ours.
The first and largest is our agreements to form a 90 10 joint venture with a local real estate, operator, where the 90.
For an initial 40, plus individual street retail properties in Hoboken, New Jersey.
Our share of the investment approximate $185 million.
The properties, mostly apartments over street retail a prime retail a prime real estate sites on either wants me Street.
Fourth 14th Street, two of Hoboken main commercial thoroughfares.
We're very bullish on Hoboken, and its access to the increasingly important west side of Manhattan, including the $20 billion plus Hudson yards development.
That access is easier than in many areas the Manhattan through the path fairy and Abbas through the immediately adjacent like a tunnel, one or more transportation choices, which is walkable from the buildings were buying.
Well, we loved the potential rent upside in both retail and residential income streams as Hoboken continues to mature and find favor among city commuters maybe the most important part of this badger is that it creates a far more productive business development arm for us and Herb and New Jersey.
We expect this initial set of assets to be just the beginning.
The other two were smaller and very different from the first.
A more conventional grocery anchored center in a very densely populated urban neighborhoods with under market rents surface parking and potential pad development opportunities demographics that are that are both incredibly dance with strong incomes surface Parkside. This large and the middle of an urban residential neighborhood like this it's unusual.
And finally, we have an income producing retail site in Fairfax, Virginia under contract that is immediately adjacent to our first quarter 2019 acquisition of Fairfax Junction.
Separately each center is relatively small for us with limited future potential early in the year you may have wondered why we bought the first what together the combined 11 acre site at the prominent intersection of Lee Highway and Mainstreet Fairfax is powerful.
Along the way it will serve as a solid current income producer, but in the future wonderful raw material for Densification and inclusion of other uses.
I go through this combined near 300 million dollar investment before their clothes for two reasons.
First.
The breadth of the type of property, we look at.
Everything from urban Street retail with rent and development upside more effectively acquiring a regional growth partner.
So in urban grocery anchored shopping center with rent and Pat upside.
So in effect of land assemblage with the current yielding income stream in an AFE woman affluent Washington, D.C. suburb, serving as raw material for the future.
The common thread through all this compelling long term retail based real estate relevant real estate, both for today and in the future with an obvious path to income and value.
Now how do we pay for.
Sales of plasma coin and a single building at her most beach, California to assets, where we could not see a path to growth Gotta started.
The sale of 12 acres under the threat of condemnation at San Antonio Centre, which we expect to close in the fourth quarter by the way along with some pretty attractive assumed debt on the acquisitions make up the rest.
So here's the overall math these assets, assuming we close on all of them will provide nearly a nickel with initial annual FFO accretion net of the last fall the sold assets, but that's just a byproduct of the capital allocation rationale.
The reality is that we're investing in assets with great mid and long term futures and a 10 year I or are in excess of six NAFTA said.
Funding that investment with asset sales and assume that a properties with few long term growth prospects and a 10 year caused a four and a half person.
What did 2% improvement the iroar of nearly 300 million hours of recycled capital.
It's an investment approach like this which balance the short term accretion with long term value add that gives us such great confidence in federal realty's future through inevitable cycles.
Especially for my prepared comments all the focus on short term occupancy current earnings and lease up expectations. As this uncertain time, it's understandable and it's certainly important.
What a company's clear path to growth and mid and long term relevancy of its real retail real estate long. After the current vacancies have been leased up is in our view far more important.
Let me turn it over to Dan for addressing your question.
Yeah.
Thank you Doug good morning.
Our reported AFFO per share of $1.43 cents translates to 159 per share when adjusting for the one time charge relating to the purchase of the Kmart lease at Assembly.
Well 159 figure the appropriate comparison for consensus and year over year purposes. This quarter.
While the solid result was driven primarily by continued benefit from our proactive leasing activity as well as lower property level expenses. It was offset by the weight of opportunistic capital transactions during the quarter, including both debt and equity issuance as well as asset sales.
Slightly higher DNA than we had originally forecasted.
And continued drag from a redevelopment and remerchandising initiatives a properties in both the comparable and Noncomparable pools.
Our comparable POI metric came in at 2.1% for the quarter.
Ahead of our expectations, bringing this metric through the first nine months this year to 3%.
In the third quarter net benefit from proactive releasing activity boosted the result of 175 basis points versus third quarter 2018, while we had another strong quarter from term fees, we received very little boost from them and comparable POI with just 17 basis points of tailwind versus last year.
But again faced 70 basis points of drag from repositioning programs at some of our larger assets like Plaza El Segundo congressional and Huntington.
As a result of the better than expected quarter, we're increasing our forecast for comparable POI 2019 for moraines of 2% to 3%.
To about 3%.
Well Don emphasized our focus on positioning our portfolio for long term and the potential short term impact of these repositioning remerchandising initiatives the quality of our real estate is driving abroad upgrade and our tenant base as evidenced.
By a new leasing activity.
If you have to know include a new 40000 square foot urban target as part of our Hollywood Boulevard redevelopment in L.A.
A new 38000 square foot home depot design opening up Montrose crossing a great add to that center and our whole market.
We finalized the deal to relocate Walgreens at the Darien redevelopment at significant uptick in rent from the old lease.
And we've also been proactive in reducing exposure to struggling retailers.
One example is changing out two of our three remaining cost plus locations to bring in uses which enhanced the merchandising at Escondida and Pentagon row.
Combined with the recent opening of Nordstrom rack at Plaza El Segundo in the last 12 months, we've reduced our exposure to cost plus from four locations down to just wondering.
While our lease percentage ticked up to 94.2% we expect the during the quarter, we expect our occupied percentage to begin to feel some impact over the next few quarters as we get after some of these repositioning opportunities the Dod previously highlighted.
As Kmart at Assembly stop and shop, a Darien Banana Republic, a third freed are turned over for more relevant Tennessee and the full impact of breast Barnes closure mutes, our occupancy as well as our Epo to start the year.
With respect to new developments, you may have noticed some updates and new additions to the redevelopment schedule on page 16 over 8-K supplement.
As John discussed we expanded the scope.
Of our redevelopment project to Cocowalk with the early recapture the gaps based on the west side of the project resulted in a modest increase to the budget. However, we are maintaining our targeted developed and yield on that incremental capital.
At Hollywood Boulevard, where we are combining and re demising spaces to bring in that previously mentioned, new urban target and a collection of QSR, while doing a complete refresh on the west side of that project.
A roughly $20 million incremental spend at a targeted 9% incremental return.
And that warrants park in Philadelphia, where we locked in long term an established need your medical use and less strict less attractive lower level space and created more attractive retail square footage at the front of the property you will see a complete repriced at that property as well $10 million of incremental capital.
At an incremental.
8% yield.
Now, let's discuss some of the capital activity during the quarter given the big rally in the Treasury market during the third quarter, we're able to be opportunistic buy reopening our 10 year notes due 2029 for an additional 100 plus million dollars of proceeds at 2.74%.
Time of issuance, the lowest 10 year bond ever issued by a read.
We also took advantage of the strengthen the equity market by accessing our ATM program for an additional $75 million of proceeds and lastly, we closed on the remaining 70 million about dollars of asset sales. We have been working on at the time far left earnings call, Although one close after the quarter it.
Selling to non core assets on the west coast for a blended mid fives cap rate, bringing our total assets sales for the year to just shy of 150 million at a blended upper fives yield.
More importantly, a blended sub 6% Unlevered IR.
This activity positions us with higher than normal levels of liquidity with above average cash on hand at a 163 million and nothing drawn on our newly expanded 1 billion dollar credit facility.
While this enhanced financial flexibility will weigh on results by a few pennies for the second half of 2019, we couldn't be better position to execute on our business plan on both the development as well as the acquisition front.
Our credit and liquidity metrics continue to be at extremely comfortable levels for a minus rating at quarter end, our net debt to EBITDA stood at 5.3 times are fixed charge coverage ratio steady at 4.3 times and our weighted average debt maturity remains at 11 years.
With respect to AFFO guidance for the balance of 2019 were adjusting and tightening our range from 636 46 per share.
To a new range of 632 to 638 as adjusted for the acquisition of Kmart.
On a redefine basis, which includes the Kmart charge this range as 616 to 622.
The primary driver of this revision.
Is the capital markets activity I, just highlighted as being pinch positioned with more cash on hand, plus running the impact of our asset sale activity through our model impacts results and the midpoint by a penny this quarter and a forecasted two pennies next quarter.
With increasing macro headwinds of slowly slowing economic growth trade wars, and both global and domestic political uncertainty running the balance sheet with more conservatism, even though slightly dilutive to current years earnings seems prudent at this time.
Now onto some preliminary thoughts on 2020.
We are still in the midst of our 2020 budgeting process. So I'm going to keep this very directional in nature.
Still more wood to chop and finalizing our forecast and we've alluded to the greater intensity, but what's really going after repositioning remerchandising opportunities on our portfolio for the medium and long term value creation at the expense of near term growth over the next several quarters.
Roughly $6 million of net drag from this activity driven by the recapture some larger anchor spaces that we've mentioned Kmart at assembly stop and shop, a Darien Banana Republic, a third street as well as a handful of smaller deal roughly in that half a million dollar per year rent range at places like Santana row and the former.
Cost plus deals that escondido.
And Pentagon row.
We may also get after some more reach remerchandising opportunities given that we see an environment, which is ripe for upgrading our fantasy.
We also have the impact of losing 10, dressbarn locations, which have two and a half million two and a half million dollar run rate of annual rent that is projected to impact all of 2020.
While we are active in discussions to backfill six of the Chen that we've lost that rent won't begins to come back online until 2021.
Despite these headwinds we still estimate that we have a baseline of net growth roughly 11 to 12 cents, which should get us into the mid 640 as a low end of the range.
Like with last year's preliminary guidance, it's still too early in our forecast process to predict how much higher we can push the upper end of guidance range.
However, given the diversity of growth drivers, we have an arsenal.
Secular growth outside the comparable pool 700, Santana coming online continued maturation as assembly and Pike <unk> rose.
The redevelopment deliveries such as Cocowalk, Jordan Downs and ballot can would residential starting to contribute.
In 2020, plus the acquisitions, we expect to close this quarter.
With an offset from the aforementioned aggressive proactive releasing initiative expected tenant departures just highlighted as well as a tough term be comparable given a strong 2019 on that front.
Preliminary target for the upper end to the rain could push up into the low six sixty's.
We will have more for you on this topic on our next call.
When we look forward to seeing many of you had never read in Los Angeles on a couple of weeks.
And with that operator, you can open up the line for questions.
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For participants use the speaker equipment, and maybe necessary to pick up your handset before prices to Sarkies, one moment well be post my first question.
My first question comes from Nick Yulico with Scotia Bank. Please proceed with your question.
Sorry, Hey, good morning, this is Greg on a with Nick.
Let's just start hoping to get a few more details on Kmart and assembly square marketplace I'm curious when they stopped paying rent.
And the expectations on back filling in terms of timing and rent again, a and then what else needs to happen at that asset for you can really start considering redeveloping a that land.
Sure Greg that's talking about a few things about it so and I assume you're you're pretty familiar where it is on the site and how it got it.
Connects effectively the power center with the mixed use property.
Assuming you know that thinking about that first of all the rent will continue through the end of year. I think are just about through the end of year, then it will be out.
We have entitlement to do on that site.
That will take a couple of years to effectively it yes.
You know for us to be able to to start construction to be able to put stuff together, we don't expect adjusted on that property.
For those couple of years, we expect to lease up.
There's a couple of ways to do it it may even not be retail and in terms of how it how it gets leased up because at the end of the day today, It's a giant hundred thousand square foot box ground floor right next to transportation that there is pretty darn significant temporary tenant activity.
Right now nothing done, but something that that would be really cool and actually accretive to 2020 to the extent, we can get it done just not done yet when we do get that thing really.
You know re entitled resigned, which we hope to be able to do.
You know as I say in a in a couple of years the massing on that.
Site should be in the hundreds of millions of dollars have spent so big deal certainly worth waiting for.
To the extent, we get it done okay.
Yeah, and just to clarify on that one so the entitlements that you have at Assembly square don't transfer over to that to that area.
There are fine for for retail for the use that it is today, but we have some other.
Ideas for before.
You know residential and our office on that site. In addition.
Okay. Thanks, and then just for a second follow up here. So based on your earlier comments regarding a banana Republic you exclusively looking at redevelopment opportunities there what might that look like or are you still considering a retail backfill traditional retail back though.
Jeff wants to take that.
Yeah, Hey, Greg we've got a number of alternatives, we're working through right now when we say redevelopment, we're not really talking about.
Changing the building envelope.
But but reworking the enter the building on the reworking some new uses it could go into the building a traditional retail is potential for a portion of the backfill.
But not all of it.
But we're still working through.
Three or four alternatives, we have for the building right now the.
The response to our leasing and marketing effort there has been great and yes, hopefully in a quarter or two will be able to get a little bit more.
Finished divide the encore without it.
You should by the way Greg you should by the way expect more rent than than the rents were getting out in today a lot of times you look at that you're saying well 2 million Bucks coming out of that building. That's it that's a big number one how do you get more and you.
When somebody's paying a lot of ranch in vocations like that you can be pretty darn comfortable that we will and even the capital necessary to do that will create an accretive.
You know project there.
Yeah like like dogs said in his prepared remarks, you know regardless of which Directionally go.
The uses that go into the building are gonna be additive relative to current a tenant.
To that end of the street and support or other assets on a on the prominent.
All right. Thank you very much.
Our next question comes from Christy Mcelroy with Citi. Please proceed with your question.
Hey, good morning I.
Just wanted to follow up on Hoboken could you could you say, what the timing wise that the closure of the remaining deals and currently is all that space on by single partner and sort of whats the benefit of kind of cost sharing and possibly aggregating more space in that market.
Good questions Christy Thanks for asking them first of all the timing we closed on the first building in September most of the rest of it.
We'll be closed in the fourth quarter us some of that may drag into the first quarter.
We're dealing with we're dealing with.
Some different partnerships are different different structures and it's it's a bunch of buildings.
So so in terms of so that's the timing in terms of of what's going on here one of the things that we have always struggled with in terms of street retail is getting.
Enough.
Of critical mass on the streets effectively be a real player and to influence both the merchandising and street and influence the economics on the Street, we were able to do it and third street prominent.
You know years ago, you may remember that we tried to do it on Newbury Street in Boston, We had bought a couple of buildings, but were never able to get as much as as we wanted so we sold those buildings when we when the bigger deal fell through this is the next time has all the latest iteration that that's where were you know you do 40.
Buildings, both downtown and Uptown.
In Hoboken, well, we've got some power and you know I understand this is probably the worst kept secret in read them and so we've been doing an awful lot of work with respect to the demand for this these buildings what the rents would be in terms of that demand and it has been extremely positive.
So we're very bullish on.
What can happen here the idea of more is exactly as as you would expect that that.
The clustering.
Of.
Yes.
More of the retail store fronts here gives us clearly more leverage with tenants who wants to come in.
Thanks, and then just in looking at 2020. Thank you for all that detail on the kind of the preliminary range, but also lot of moving parts in terms of space recapture in terms of whats known at this point.
You know as you as you kind of look into your budgeting and you think about what are known for credit loss and tenant fallout.
How are you thinking about next year you look at it more conservatively than you did in 29 keen or is it about the phone.
In terms of the kind of in kind of credit environment right now.
Yes at this early stage of the process I think we're kind of sitting and kind of a similar type of.
Position as last year, I think we would expect the kind of that that credit loss will there be bad debt expense.
Expected vacancy rate relief kind of in total all of those different components kind of consistent with kind of how we've looked at it over last year and even the year before I don't think at this point, we're getting more conservative or more aggressive.
I think where we sit today, a kind of keeping in line with the past history is.
Where we feel most comfortable.
Okay. Thank you.
Our next question comes from Jeremy Metz would be a more capital. Please proceed with your question.
Hey, guys. Good morning, I'm, Dan appreciate a directional outlook for 2020 sticking with that in the revised expectations here in 2019, but also some of the drags you noted.
How should we thinking how should we think about the comp POI trajectory.
From here.
Relative to the 3% you're now expecting 2019, and then if you have that how much will be coming into the pool next year in terms on the residential and commercial as though should be pretty additive.
Yeah, No I think that.
One of the things that we're still too early in our process. This was a real yeah. We go through a pretty rigorous budgeting process thats very ground up yeah with only 100 properties were able to dig into each and every asset begin to each and every business plan at each asset and roll everything no. We're not at the point, where we've got a sense of that.
This is very top down and directional so I don't really have a sense on where comparable as I said a lot of moving parts lot of work to do so I'm not prepared to kind of give a sense of trajectory on the call POI basis.
But hey look I think that.
From a residential in an office perspective within the comparable pool, Yeah. Most of all you know a good chunk of our residential areas outside of the comparable pool, but there's some within it particularly on the west coast or you know that should be additive that should be beneficial and that should help.
The the comparable number but still too early for us to kinda give any kind of direction.
One way or the other on on kind of guidance.
You know for next year.
All right and then Dawn you got a lot in the pipeline here in the acquisition front you mentioned the pick up an interesting opportunities out there that conducive environment to go out and capitalize on these you obviously have to balance sheet to do so.
Beyond the 300 million here, how active is the pipeline beyond that is there more in the works that we could be hearing about here in short order.
There is Jeremy its.
Hey.
We're asked a lot you know.
To kind of smoothed out the notion of acquisitions, how much we would do whereas two to how much proactive releasing would we do the reality is this kind of where you started and you're spot on on it is you take advantage of opportunities when they avail themselves and and that's not move.
And so you know I think about kind of some of the stuff we're doing both on the acquisition excite site.
Side, and the proactive side and you know I know a lot of this stuff, including acquisitions, we've been trying to get done for a long time, but the market wasn't ready the economics weren't ready and it's it's a it's really a very good time I'm very optimistic on our future on where we're going out why we're we're doing it goes were.
Able to do some deals that were high five and ourselves around event around around here and that hasn't happened, while even know what's your turn dilutive. So yeah, you very well maybe hearing about more.
Thanks.
Our next question comes from Craig Smith with Bank of America. Please proceed with your quick.
Great. Thank you.
Don when you.
Introduces the Hoboken acquisition, you said that it can create business opportunities and.
Development arm in New Jersey, it sounds like that would obviously be beyond Hoboken, but could you describe what you could see happening there.
I couldn't but I'd prefer not to [laughter]. The you know.
We are David this is in initial.
Partnership with.
You know a local company that has done an amazing job frankly of accumulating.
Everything that's that's there.
They also have pretty large long.
Tentacles into other properties and other development opportunities there so the idea of us.
Sam what we got and being able to to do more with them including potential.
Opportunities in and around Hoboken.
So I'm not talking about you know Morris county or or anything.
You know far away from a from this center of gravity, which is where we're going to concentrate.
Okay. Thank you.
You bet.
Our next question comes from Samir Khanal with Evercore. Please proceed with the Quinn.
Then just sticking to the comparable Pugh I.
Questions here I, just want to make sure for for dairy and where it when you lose that the stop in shop, where the million dollar rent goes out there that it does that come out of the pool next year.
Darien will come out of the comparable pool.
Basically to start the year, so that will not have that will have dragged on AFFO, but it will not have drag on next year's comparable POI metric because.
Okay, that's now comparable exactly.
And then so basically the ones to think about just to sort of summarize or it's just the K Mart you lose.
You lose the Banana Republic, and then sort of the dressbarns in any sort of unanticipated.
Kinda vacancies for next year as a sort of the headwinds right. At this point I think yeah, and then and then and then also whatever Don alluded to in we're going through the process now is whatever other remerchandising. We can get after I mean, we've been proactive and as I mentioned the cost pluses. There's there's other opportunities that as Don said when you.
Can get after stuff when when there's demand.
Bring in new tendency in Remerchandise you get after it so I think that's a that's something we're working through in our and our and our.
And our budgeting process right now so but yes, that's right.
Okay, and I guess that Dan one question here, we've been noticed the cost on Cocowalk went up a little bit here. It was around 10 million, what's what's the story there yes.
Bigger project and a and it's really you know so when we laid that out the west side of the project has a two level gap store in it that had term.
We were so we really didn't whereas we did our development plan to redevelopment plans, we didnt expect to touch that side.
It's gap and its 2019, not 2016 or 15, and so we got to deal.
To be able to get to that space and therefore access the west.
When you if you will have the project adds were going through construction.
The rest of the project what is clearly a better thing Didnt think we could but the time to allow us to so you've got a bigger project there and you got a you know you've got a nothing that change what changes with yield so you're getting paid for the incremental capital on that I think it's a real positive.
Thanks Kim.
Our next question comes from Alexander Goldfarb with Sandler O'neil. Please proceed with the Quinn.
Hey.
Good morning down there so.
So just a few questions first dawn I. Appreciate the you know your comparison of the Hoboken first your efforts on Newbury Street number of years ago, but just sort of curious how you viewed street retail.
In Hoboken versus obviously, what's going on here in New York, or Miami, where street retail has become sort of but bad word what gave you comfort that in Hoboken, you know it didnt experienced the same.
Situation that B cell street retail in other areas.
Yeah, you know, it's so funny.
Alex and you know me and I'm, a jersey good through with through.
And it's a whole lot different than Manhattan, right, the and the people that go to go to jail Hoboken are they even that moved to Hoboken heart are generally from Jersey.
Who go there they're not come from long island are not come from West Chester et cetera. So if it is a completely different market. The in place rents Alex are below 50 Bucks.
So we're not talking about 200 dollar street retail we're not talking about.
You know numbers that are that are scary that way. The you know the in place ready rents are $2.65. So we're not talking about.
You know things that have run to the extent of.
Of anywhere near the markets that you just me what has changed I'll tell you what.
Change is it except ability and its access to the more important parts of Manhattan now because I mean, that's changing.
Right and so when you sit and you think about about getting to that west side from a lot of places in Manhattan. It Ain't EG.
And.
We're hopeful that that Hoboken, we'll see part of the globe. If you will from all of that investment and I can tell you. The early deals that were talking about.
Our validating validating that thesis.
Okay and then the second question is on 2020 odd Don clearly at the Investor Day earlier. This year you guys emphasize repeatedly the folks on dividend growth, yeah that 51 year track record.
So going through the pieces, Dan mentioned eight cents coming out of the retail odd the drag from the capital, but it sounded like through the acquisition program. There was a net five cents a positive from the capital activities with what's going on the acquisition side are you still the eight cents net.
Give on the retail so it's sort of that's net three cents down if my math is right. What are the other factors that are contributing to what would seem an abnormally low earnings growth year for you guys are there other things that are going on is it other drag or is it other potential projects that you may do just trying to put the pieces together.
Yeah listen I I feel for you because we are at a multi dimensional company. We have a lot of pieces. You know it's not we're not trying to lease up you know a bunch of empty boxes from a time when our occupancy was really low that provide some grow that's not that at all so when you sit and you think of.
Things like the.
He space on hopefully on February Onest being turned over to Splunk, and 700, Santana row and that income starting on February Onest, that's a pretty good thing that.
Adds to that but take a look at the balance you know there's $700 million.
Construction in progress producing exactly zero.
On that money is out.
It you know cost of money is out but income has not effectively started on that so so that that you didn't have itself is a current earnings drag if you will just to some extent.
So associated there at the other things are gosh, I think we went through but I think Dan you did a pretty good job a going through most of the big ones that we we we can think through not with the specificity of month by month rent starts and rent the rent.
Dilutions, but from my perspective, if we can make this portfolio stronger and better for you know the future and still grow even if it's smaller.
To me that that says everything about the quality the assets because we haven't.
We didn't get beat up two years ago, one year ago, three years ago four years ago with earnings as you know we grown every single year.
You do and you've obviously done a good job managing the develop the massive developments you've delivered over the past few years.
Which is why asked the question because the past few years, you're able to manage through that develop contract. That's why I was just wondering what if there any one specific item that was impacting the 2020.
But I appreciate your common stock.
Thanks Bye.
Our next question comes from handles think chose with Mizuho. Please proceed with your question.
Hey, good morning.
So Dan I guess, just not to beat on the dead horse, but the acquisition certainly a sense an excitement and your voice that I haven't heard an acquisition front at a long time, so I guess I'm curious, what's you're getting from the seller side of it more willing to be in gauged other pricing expectations changing is your cost of capital, making some of these deals a bit more easy to under.
Right just curious on what sort of driving some of them together, but oh, you know it lot of human things I think there is absolutely the overall notion that.
The economy isn't going to stay strong forever.
That that you know share there is a recession coming someday whenever that is going to be that time today, as such where where.
The.
Assets are especially when we're talking about really really good assets right. We're not talking we're not talking about you know.
Sellers, who are are you know looking at at dumping properties and add having their cap rates go up and be able to get get paid because if there is the only time. They can get paid but we are talking about sellers, who know when they have a good thing are generally and this is just Mike my gut worried about the future.
In terms of.
The economy and no they can get paid pretty well today and wasn't obvious.
A couple of years ago, so that that's on the acquisition side on the proactive releasing side you know.
I think theres been a major shift in not only retailers, but but in most businesses in the coming in the country of it's better to rip the band aid off.
Rather than worked through problems long term and I think we see that in a number of different places you know went up.
At a restaurant company who was.
Not doing well in the DC area, but doing well in other places I think the old days. They would have kind of not wanted to close their stores, let's say in the in the DC area. They work through it today, there are more willing to rip it off and move forward. So there is that psyche that's out there today both on the so.
Sellers of property side and the business people are doing business in retail today that in my view is fundamentally different than it was a few years back does it impact impact pricing not significantly.
All of these deals were really happy with the with what we're doing how our getting them, but there's still real expensive because they're great real estate.
So I hope that helps.
That does that does and I guess I'm curious on the the thinking here and the willingness to take that some of the incremental dilution and track clearly the market is is reacting to bit negatively I think they're higher expectations for growth and so fully appreciating your best thing you have a great portfolio new building for the long term just curious how you you factored all that into your thinking why now I understand some of that maybe entitlement related but just.
Curious.
Just how that always horrible it's a very it's an important question I I thought it covers my earlier stuff, but let me make your crystal clear now because you do it when you can.
And it's not always available.
And in it kind of goes to your previous question on on on the psyche. If companies are willing to make changes to chew deal economically not have silly expectations for which there is no economic deal I Love up we've always you know, it's always for sale, but not not practically speaking, it's not and so.
So.
Hey, there's no wage no way, we wouldn't do the Kmart deal to save a million dollars next year. There's no way, we wouldn't do you know the dairy and deal to affect the just say that million dollars next year and if there's four more of those no well do those too because there were available today working on.
This stuff for years, there's a fundamental difference in in the.
Psyche of people in our business willing to be reasonable with respect to economics today I believe.
Thank you.
Our next question comes from Derrick Johnson with Dr. plane pleased to see if it's a question.
Hi, everybody. Thank you.
Just back to Kmart at Assembly briefly.
Are you concerned about the entitlement process for residential there you know coupled with low development yields in the probable inclusion of a percentage of affordable housing no would an office mixed use make more sense given that Puma will fully will be moved in.
It might.
And Amiket unconcerned about everything all the time on on development and.
Processes in how we get through but none of that changes the real estate fact that when there's an opportunity jump on it because truly I think any decent real estate guy can sit back grab a couple of coffee sit on that site and look at the traffic and look at the way things go between too.
Thanks, and say, there's an economically viable way.
To create significant value here.
Exactly what that might be who knows.
At this point and I know, the who knows isn't something you can put into modeling and and you know we factor in 2020 or 2021.
For that matter, but the you know the jump to can they do something better accretively in a both an income perspective in a value perspective on that six acres, that's not a long lead.
Most people I think you get there.
Yes, that's a great property and I completely understand and just shifting gears you know we haven't really had an update on prime store JV.
The West coast didn't quite awhile, and just any thoughts on further projects with them or could we see this relationship.
Develop or grow over the next few years and are there any other opportunities within the portfolio and other metro such as Miami to kind of replicate.
The success there.
Yes, Jeff Jeff can you take five Sir.
Yeah, Yeah sure so.
We are operationally doing great right on top of what we underwrote a couple of years ago in terms of the capital that we've invested in the a and a wire POI that we expected.
So everything from that standpoint is going as planned.
We would love to grow the footprint.
And we're we're doing that maybe a little bit slower than I would've liked but we're doing that is mostly though we have jordan downside or construction.
Moving into next year, we were able to acquire the toys R us box.
Jason to our lowest hardiness property and Bell gardens late last year and we've got a couple other things from the acquisition pipeline that we're working on as we speak for the old hopefully come to fruition early next year.
You know that said, maybe you've heard this from us before.
The acquisitions market is competitive and difficult, particularly in L.A., all the California quite frankly and yeah. We're disciplined about how we go about that part of our business as is for I'm store. So you know to the extent, we can shake stuff loose, where we think we can make money we're well on.
We wouldn't do a deal just to do a deal which is probably white haven't haven't seen us.
From an acquisition perspective significantly without without platform, yet, but it's definitely something we want to do it's definitely something we work hard on everyday Don I'll, let you take the second half of the question on other Metro's if you don't mind.
Yes, no no not at all I mean, you know conceptually there something there.
Yeah, I mean, even with respect to what we're doing.
In Hoboken in and around Hoboken, as we as we think that through that's a potential other market that we can look and but we want to make sure we have the experts.
In those markets before we before we jump in so stay tune.
Thanks, guys.
Our next question comes from Michael Mueller with JP Morgan. Please proceed with your question.
Yeah, Hi, I guess on the Hoboken transaction, what's the rough split between residential and retail in terms of NOI.
So.
70, 30, but yes, roughly 70 retail or 70 commercial retail and at a little bit of office in about 30%.
Residential.
Got it Okay, and then Dan you mentioned some lease term income in the quarter can you just to quantify what that was.
Yeah, Yeah, we had yeah, we had a strong quarter in 2018.
So last year of 2.6 million and 2.8 million a this quarter.
So a modest boost to the comparable but it wasn't a big big driver.
Of our outperformance on the comparable basis.
Got it okay that was it thank you.
Thanks, Mike.
Our next question comes from fits Subone with Green Street Advisors. Please proceed with your question.
Hey, good morning.
Could you elaborate on your plant for you on your plans at 30 prominent and also talk a little bit about the overall health of the retail area. There because there are some vacancy is on third street in Santa Monica place. So just wondering how that is impacting the rents you're expecting at a banana Republic redev.
Okay I'm Jeff.
Yeah No. There is there's some turnover on the problem going on right now that's that's definitely true and you know as you go south on the street in the Santa Monica place.
But I know your local you can you can see that.
You know, we're we're very close always surprised to what we have going on a banana Republic.
Like I said, a few minutes ago, we've got.
Three four alternatives that we're working through there is competition for the building for the space of and building.
As Don said, you know the rent a whichever direction, we choose to go we're going to collect a materially more rent and then we're currently collecting so you know because because we are in kind of a leasing marketing.
Negotiating mode right now I really can't say a lot more about it cannot.
But we like I said pleasantly surprised and.
It's going to be accretive deal for us.
The only thing I would add to that you'd be and Vince just to think about never been should think about this for US one of the cool things you get here is that we don't Jess we evaluate for highest and best use of the real estate.
And so to the extent there is you know, there's a better use and retail for all or part.
Have a building or a shopping center or whatever we can do that and so I, obviously I think about it as as you sit in talking about third street or any other market where where.
The success of that Street has absolutely broad demand from other users who pay pretty darn good economic numbers to be in there. We've got the ability to look at it that way and therefore to execute it that way.
And I think Thats an advantage.
Interesting, but the third thing then entitlements you haven't place are now are just retailer that something or exploring potentially changing the user adding additional high which now there are restrictions in Santa Monica to do that so that spot.
Yeah, we won't be we won't be adding additional high.
Okay.
Yes, my previous comment we're going to be working within the existing building envelope and depending on the use there may be.
Some work we have to do with the city, but we're not a we're confident that we would we would get through that so.
Okay, great. Thank you thought.
Our next question comes home Florist, then jump with Compass point. Please proceed with your question.
Good morning, Thanks for taking my question.
Question, a follow up question on the Street retail your urban Street retail you found on two deals Prime store and the Hoboken transaction as you think about that first how much or would you need to be able to invest to be able to consider an opportunity like that and also how many other markets.
Around the country.
I think could meet your criteria.
Laura said it it's a good question, but a difficult one.
No. We don't go out and look for Street retail, we don't go out and look for grocery anchored shopping centers, we don't go out and look for.
Land assemblage is to put things together basically what what what we are doing is.
I'm trying to find places for which demand exceeds supply and when you have a place like that like Hoboken for example, the.
The notion there is can you get enough and I don't know what the number is floors, but if you look at our history you get a pretty good idea. You know we spent like 40 million Bucks 50 million bucks or so something like that on Newberry, a few years ago and then we're talking about a 200 million dollar plus deal that we were on.
Unable to get so when we were stuck and with with just $40 million or so.
However, the number was at that point, we said no we can't impact change so we sold it.
Similarly, you see that we just sold her most.
Which was one building integrate area that I mean, if we controlled or most of beach, California.
I'd love to own and continued own in her most beach, California, we didnt. So we look at it looked at it there through the myopic guys. If you will have one building and what what we can do with that one building. The when we talk to our Toro at times store about that rationale he fully agrees that understands that.
That with us so so there's a there's a symbiosis in terms of what it is that we're trying to do there I expect to have that same type of symbiosis in Hoboken with our partner there and in you know as I think I've said in the past we've been unable to get it done well in Miami and and it depends.
Hands on each particular site that we see and in whether we're confident that the rents can be rolled up whether we're confident that we could build more if that's the case, there et cetera. So I don't have a good answer for you other than to really reinforce that we are not a street retail company, we're not a grocery anchored shopping center company, we're not a mixture.
His company, we are a real estate company that bases ourselves in retail based properties and whatever that could mean from it so it's a nuance.
But I you know.
And I know, it's a big important or it's easier to categorize, but I can't really help you as much as I'd like to with with that because we look at it from a real estate point again.
Fair enough, maybe just a <unk> might be early but can you make any comments as to return expectations or will you be introducing the JV partner at a later point.
I will be at a later point, let us get through the they the rest of this thing got to get a closed up and ill talk more about this.
Thanks.
Our next question comes on Linda Tsai with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question you already discussed Banana Republic that first stop and shopping Kmart, what do replacement rents look like there and then how are you thinking about the population of the 10, dressbarns and the level of replacement rents or types of redevelopment opportunities.
You bet, let me take the first soon and Danny take it from there. The you know the Kmart site as more complex. So any any short term replacement rent I would expect to more than covered.
The Kmart rent on a per foot basis, I don't know what do we get the whole 100000 or whatever it is done, but but I I think you I think you'd be you'll be happy with that in the short term in a longer term. It's obviously a much better thing from a value created perspective, because it's so much bigger.
At sovereign shop, and you kind of you see it in the in the go to our redevelopment schedule and the overall.
You know project of dairy and Redeveloping dairy and which will include residential which will include boutique retail which will include.
Yeah well.
We'll see what else it goes as we as we go through what but certainly.
Accretive to to the rent we lost.
And then with regards to the Dressbarns.
It's a case by case basis, you know one of the things that dressbarn as they did pay market rent. So as we expect to kind of really see the upside.
Our dressbarns is really just kind of putting in merchandising and tendency that enhances.
The broader center it enhances the long term value the real estate.
I I don't think I think you'll see some some roll ups and I think you'll see some you know a kind of staying flats and they are set up a little bit of a mix, but there's not a whole a ton of rent upside on the best bonds.
Thanks.
Our next question comes from Christy Mcelroy with Citi. Please proceed with your question.
Hey, it's Michael Bilerman with Christie.
On a quick quick question for you back in May at the Investor Day, we sort of dropped in your opening comments the thought about selling an interest in.
And at your asset base and in certain projects.
That would raise substantial sums and when I put you on it and they follow up you said there was nothing planned today.
I guess now that your acquisition pipeline seems to be growing you have the 200 million dollar deal in Hoboken sounds like you've got a lot of a lot of other irons in the fire.
Would you give that more consideration today to bring in a capital into some of your deals rather than issuing equity.
On your ATM.
Yes, Mike it's it's a very fair question and and you know every [laughter].
I won't say every deal I would say every six months certainly more than then our annual budget process. We guard this balance sheet like.
Fort Knox and so there's never a conversation of what happens on the left side as the balance sheet that is not.
You know shared and get an equal time for what happens on the right side of the balance sheet. So so even when you sit down do you know you think about where we are today. We did think prudent use of the ATM was the best solution I always wants to have.
As a few.
Competing goals on the.
On the common shareholders' money and so joint ventures, selling you know pieces of things do complicate that and so generally I have a bias to not do that.
Which is what I was was saying in in May and that's still applies today, having said that to the extent there are opportunities that overall make an awful lot of sensor the long term value of this company, but but it but we'll never were never going to do big equity issuances or whatever they do big anything on the rights.
The balance sheet, we want all those arrows in our quiver to be available to us to the extent do you know bigger ones hit then sure we would open up that.
That spigot, so it's a balance I know, it's a complicated answer but if you were working with me on on that side I think it I think you'd agree that that you know every six months or so you do take a real look at that make sure you understand what irons in the fire actually going to close you know, how you're going to get animal all done it.
For and so far I think we've done it I think it's really good that.
Right, but at least an example of prime Stronz Hoboken deal, you're you have a partner that staying in from a capital and and also providing some operating.
Level I would say joint venture with a capital partner in the least complex in terms of a relationship because you're just taking their money rather meets all the lease value add it's also the least value add right I mean, because the yes, it's more collect more complex, bringing a partaking in a partner, but we're getting something strategically.
To create real estate value for those things and that that trumps just money because at the end it's just money.
Right.
Now I'd like money I.
I think you due to.
So what how big is this pipeline I mean, how big could acquisitions get next next year, you're talking about a billion dollars are you talking five.
I'm not I'm not I'm not you know the if you look at what we've done over over our history. The one thing I like about US a lot is.
Balance in moderation, so you're not talking about $1 billion acquisitions, you're probably not talking about a half a billion dollars of acquisitions, but I would put that at the upper end at the upper limit.
Okay. Thank you.
You bet.
Our next question comes from Ki bin Kim with Suntrust. Please proceed with the question.
Thanks, just bigger picture Don has your real view on the health of retail changed at all.
Last year.
For your tenant.
And I might I can answer for that but what do you think mispriced and this business and maybe in the simplest answer to know if that's the value per pound for different types of shopping centers versus maybe even certain retailers that are pretty that's really healthy that people are willing to go chase after with more money yet you know this that second part.
To that question I'm I'd love to have a beer with you and sit and talk through it's a it's a whole lot more complex than you know then the 30 seconds I'm going to be able to answer.
The question on I'm, So I'm going to give you an added a bigger picture point on the first question first part of the question that you ask yes, I think there is a.
Healthier frankly retailer mindset out there, it's healthier and it's not always it's not always better for the landlord.
There is some there's tough negotiations there's the the as I said before the preponderance of the ability to rip the band they'd off and move forward I view those things as healthy because it does suggest that there is a plan for them to move forward I like that I hate and we do see this inside.
In sum grocery operators today, where there's still you know at the real estate level. There's maybe we'll consider this maybe we'll consider that not really sure how that works all the way up top to the you know the boards and the Ceos offices those companies that stuff I don't like so the more I do.
Overall see see more.
Definitive nets, if you will in business plans that while not always good for us or or everybody. In this business is far better than uncertainty.
Alright, thank you.
Yep.
Thank you at this time I would like to turn the call back over to media Brady for closing comments.
Thanks for joining us today, and we will see many of you at near eight and a couple of weeks.
This concludes todays teleconference. You may disconnect your lines at this time and thank you for your participation.